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The CYP - Cyprus Pound weekly update 07 Jan 2008
In this week's
update: Now that Cyprus has joined the EU there is no longer an update for this currency. Please find the Euro update below. We will continue to send you the weekly Euro update unless you unsubscribe by clicking the link at the bottom of this email.
Bleak Sterling chart points lower
- Euro zone inflation remains too high
- Real prospect of interest rate divergence
First of all, a happy new year to all our readers. From a foreign exchange standpoint the last few of weeks of 2007 were rather more volatile than some of us might have wished and we look forward to an easing of market tensions as liquidity returns to normal. Well, there's no harm in being optimistic.
In the three weeks since our last update the Pound has continued to suffer. An initial rally to EUR 1.4050 lacked conviction and Sterling began a long and painful decline that took it to EUR 1.38 on Christmas Eve and EUR 1.36 on New Year's Eve. It opened this morning in London at EUR 1.34.
The Euro's USP is still the prospect of higher interest rates. As it is for the Bank of England, the European Central Bank's inflation target is 2 per cent a year. Recent data have shown Euro zone inflation running at 3.1 per cent. It is not hard to see why ECB President Jean-Claude Trichet still sticks to his mantra of hawkishness, nor to understand why investors buy Euros in the hope of higher yields to come.
Unlike the Bank of England, the ECB is not having to contend with weak economic data and above-target inflation at the same time. Unemployment in Germany, the economic locomotive of Europe, has been falling for two years and in December was down to 8.4 per cent, a 15 year low.
It is open to debate whether the global financial climate will allow the ECB actually to raise interest rates this year. It is after all still having to supply liquidity to the money markets. However one can be reasonably confident that the ECB will not hurry to ease policy as long as inflation remains above target. That is a big plus for the Euro.
As the Euro zone economy picks its way carefully forward, Britain stumbles over every matchstick. It may be an exaggeration to describe the recent run of UK economic data as a catalogue of disaster but you have to look very hard to find even a glimmer of light at the end of the tunnel. The whole picture points to lower Sterling interest rates and that outlook undermines the Pound. Inflationary pressures are easing. The current account deficit is widening. The newspapers were awash with doom and gloom.
Most significantly, the MPC minutes showed that the Monetary Policy Committee was unanimous in its decision to cut rates at its December meeting. MPC unanimity is not unheard-of but a 9-0 vote for lower rates led the market to believe further easing is in the pipeline, even though the MPC believed that it was easing policy "pre-emptively". This week's MPC meeting is not expected to deliver a fresh rate cut but all eyes will be on the February decision.
Having broken conclusively down from a ten-year head and shoulders chart formation the future looks bleak for Sterling. Buyers of the Euro should cover their exposure, selling Sterling forward to match expected payment dates. An element of opportunity cost risk is implicit in this strategy since any unexpected Sterling rally will be of no benefit once the position is covered. Even so, the downside risk feels a lot more real than the vague possibility of a miracle deliverance for the Pound.
For more information and expert guidance on the currency markets, call Moneycorp today on +44 (0)20 7589 3000. Alternatively go to www.moneycorp.com where you can open a free, no obligation Trading Facility.
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